2021 (6) TMI 601 - AT - Income Tax

Revision u/s 263 - nature of expenditure - expenditure on foreign exchange fluctuation - revenue or capital expenditure - exchange rate difference on returning share application money is required to be treated as capital expenditure, same was required to be disallowed as per the contents of show cause notice - HELD THAT - It is settled position in law that issuance of shares is not a trading transaction. On issuance of shares, the assets of the company are increased by the amount so obtained from the share subscribers. The amount of share application money is not profit or gain of trade undertaken by the assessee company and the share application amount are not to be brought in to the accounts for taxation purpose being on the side of capital account. Capital expenditure is allowable deduction if statue expressly so provided. Similarly an item of expenditure, though wholly and exclusively incurred for the purpose of business or profession, is not admissible as an allowance if it is of capital in nature. The criteria which can be invoked in distinguishing between the capital receipt and revenue receipt will also serve to distinguish between capital disbursement and revenue disbursement. The issue involve in the present case is directly covered by the decision of Jagatjit Industries Ltd. 2009 (9) TMI 62 - DELHI HIGH COURT held that, once that aspect becomes clear and the entire money raised through issue of equity shares is to be treated as share capital, the gains on account of foreign exchange fluctuations, in the event of such share capital being collected in foreign exchange, the determination as to whether it is to be treated as capital receipt or revenue receipt cannot depend upon the end-use of the share capital. There is no averment in the reply of the assessee that the amount of share application money was received for brand building of the assessee company. Again turning to the core issue that the share application money in nothing but a capital receipt and its return will not change its character. Even otherwise the assessee has not incurred any other amount except the exchange rate difference, which in our considered view is nothing but a capital expenses . Thus, in view of the aforesaid legal discussion, we are of the considered view that order passed by Assessing Officer is not sustainable in law and hence not only erroneous but in so far as prejudicial to the interest of the Revenue. Therefore, the twin conditions that orders is erroneous and in so far as prejudicial to the interest of revenue, as prescribed under section 263, are fulfilled in the present case. Thus, the order passed by Ld. PCIT passed under section 263 is upheld. Appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Whether the assessment order passed under section 143(3) of the Income Tax Act, 1961 was erroneous and prejudicial to the interest of the revenue.
2. Whether the expenditure of ?15,34,118/- on account of exchange rate difference on returning share application money should be treated as capital expenditure or revenue expenditure.

Issue-wise Detailed Analysis:

1. Erroneous and Prejudicial Assessment Order:
The appeal by the assessee challenges the order of the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961, which revised the assessment order passed under section 143(3). The PCIT issued a show cause notice under section 263, asserting that the assessment order was erroneous and prejudicial to the interest of the revenue due to improper treatment of exchange rate difference as revenue expenditure instead of capital expenditure. The assessee contended that the assessment order was neither erroneous nor prejudicial, as all necessary details were provided, and the Assessing Officer (AO) had considered them before passing the assessment order.

2. Treatment of Exchange Rate Difference:
The core issue revolves around whether the exchange rate difference of ?15,34,118/- on returning share application money should be classified as capital expenditure or revenue expenditure. The assessee argued that the share application money was used for business purposes, and thus, the exchange rate difference should be treated as revenue expenditure. The PCIT, however, held that the share application money constitutes a capital receipt, and its return, along with any associated exchange rate difference, should be treated as capital expenditure.

Detailed Analysis:

Background and Arguments:
The assessee, a private limited company engaged in trading medical instruments, filed its return of income for AY 2013-14. The AO made an addition of ?1,08,460/- on various expenses and completed the assessment under section 143(3). The PCIT, upon review, noted discrepancies in the treatment of exchange rate differences related to share application money returned to Soma Tech Inc. (USA). The PCIT issued a show cause notice, suggesting that the exchange rate difference should be treated as capital expenditure, which the assessee disputed, claiming it as revenue expenditure used for business activities.

PCIT’s Observations and Assessee’s Response:
The PCIT observed that the share application money and its return form part of capital transactions, and any exchange rate difference arising from such transactions should be treated as capital expenditure. The assessee, in its defense, provided detailed explanations and referenced various case laws to support its claim that the exchange rate difference should be considered revenue expenditure. The PCIT, however, did not accept these explanations and maintained that the assessment order was erroneous and prejudicial to the revenue's interest.

Tribunal’s Deliberations and Findings:
The Tribunal examined the submissions, case laws, and documents provided by both parties. It noted that the AO had indeed sought and received explanations regarding the exchange rate difference during the assessment process. However, the Tribunal found that the AO’s decision to treat the exchange rate difference as revenue expenditure was not sustainable in law. The Tribunal emphasized that share application money is a capital receipt, and its return, along with any exchange rate difference, should be treated as capital expenditure.

Legal Precedents and Conclusion:
The Tribunal referred to several legal precedents, including the Supreme Court’s decision in Malabar Industrial Co. Ltd. v. CIT and the Delhi High Court’s ruling in CIT Vs Jagatjit Industries Ltd, which supported the view that exchange rate differences related to capital receipts should be treated as capital expenditure. The Tribunal concluded that the AO’s assessment order was erroneous and prejudicial to the revenue’s interest, thereby justifying the PCIT’s revision under section 263. Consequently, the Tribunal upheld the PCIT’s order and dismissed the assessee’s appeal.

Final Judgment:
The Tribunal upheld the PCIT’s order under section 263, confirming that the assessment order was erroneous and prejudicial to the interest of the revenue. The appeal by the assessee was dismissed, and the expenditure of ?15,34,118/- on account of exchange rate difference was deemed to be capital expenditure.